The annual pay raise is dead; here’s why I’m not mourning

Pay is a crucial part of every company’s employee motivation and retention. And the reality is that how we structure compensation is as important as how much we pay — if not more so.

Here are some basic principles I have learned along the way that have helped me garner the maximum amount of staff engagement, while also managing employee expectations in a clear manner.

Wages must be based only on productivity.

Every position at every company has a specific value. This value is composed of what the position does for a company in and of itself (regardless of who occupies the position) and also what the person hired for that job brings to it. Seniority, cost of living or social constraints should never be a part of the equation. Output is what matters.

Before I hire, I determine what each position is worth in terms of its importance to the success of my company. Setting this guideline helps to ensure that all compensation is fair. Tying changes in compensation to contributions above and beyond the job description then becomes easy — both for employees to accept and for management to enact.

Commission guarantees investment.

Every member of my staff has a commission component to her salary. For account executives, the commission is simple and comes directly from the sales made. For other positions, this “commission” can relate to a bonus paid on the number of orders shipped, a quarterly distribution tied to the company’s overall growth or even a rolling reward based on positive feedback or perfect rates of task completion.

Choosing to base a portion of an employee’s salary on performance is paramount to getting employees invested in the company’s mission. Including a commission component in compensation also gives the company a cushion to help mitigate missed financial objectives or goals, whereas a straight salary system does not.

Long-term rewards alone don’t work.

Employees need to feel on a continual basis that their efforts are being noticed and appreciated. A single year-end bonus is a carrot dangled so far in the distance that it creates little attraction — even for top-flight employees — to remain engaged.

I have found that a mix of long-term and short-term rewards motivates employees to stretch beyond a comfort zone, but also to understand the real value of their contributions on every paycheck. If an employee has the ability to self-monitor her progress on a continual rather than a punctual basis, on-target performance is evident, and shortcomings become clear early on as well.

Short- and long-term benchmarks also mitigate the risk for misunderstandings, because there’s no longer a surprise (good or bad) when it comes time for reviews but a traceable performance history instead.

Compensation changes should be possible at any time.

All employees need to feel valued. As a business owner, I find it imperative that I be aware of the efforts of my staff so that I can reward them as soon as there’s reason to do so.

Waiting for an annual review, or until an employee asks for additional compensation, is not only frustrating and demotivating for the employee but also dangerous for the employer, because it gives the employee time to think that her contributions are going unnoticed or that she might be better treated elsewhere.

The time to change compensation is immediately after an employee does something great, not months later because the calendar says that’s the time. Building in both the mechanism to monitor employee contributions and the financial possibility to compensate them when appropriate is integral to employee retention.

Compensation is not only the greatest motivator, but also the most appropriate measure in the relationship between an employer and an employee. Setting compensation correctly should never be about placating, but rather about establishing a balance between output and earnings.

Vanessa Merit Nornberg opened Metal Mafia, a wholesale body and costume jewelry company, in 2004. Follow her on Twitter at @vanessanornberg. A version of this column first appeared at Inc.com.

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